IOICORP’s 9MFY23 results disappointed us but were within market expectation. Its upstream earnings dipped on lower CPO prices amidst rising costs while downstream eased on softer demand. We cut our FY23F net profit forecast by 7% (but raise our FY24F net profit forecast by 10% on lower cost and taxes). We cut our TP by 10% to RM3.80 (from RM4.20) based on 1.8x P/BV valuation but maintain our MARKET PERFORM call.

9MFY23 core net profit came in at 78% of our full-year forecast but we consider the results below our expectation as we expect a weaker 4Q. At 84% of the full-year consensus estimate, we consider its 9MFY23 results within consensus expectation.

It reported a subdued 9MFY23 due to a poor 3QFY23 core net profit of RM223.5m (-54% QoQ, -37% YoY) as upstream CPO price flattened QoQ while cost stayed high. 3QFY23’s FFB output of 0.628m MT was up 5% YoY but still seasonally down by 19% QoQ, which is better than the historical average dip of 23% for the third quarter. IOI’s 32%-owned Indonesian upstream associate, Bumitama Agri (BAL), also reported weaker results though less severe. IOI’s 3QFY23 downstream operations saw stronger YoY performance thanks to healthy refining margin but were weaker QoQ due to a strong second quarter. The RM26m positive variance between the 3QFY23 net profit and core net profit can be traced to RM69m of fair value loss which is offset by RM43m of currency exchange gains. IOI ended 3QFY23 with RM1,475m net debt (13% net gearing) versus 2QFY23‘s net debt of RM1,410m (13% net gearing).

FY23 earnings to weaken by about 10% YoY. Since mid-CY22, palm oil prices have trended down on improving edible oil supply. However, the overall supply-demand balance remains fragile as demand is also recovering. Post-COVID demand recovery during much of CY22 was restrained by high prices while China, the biggest edible oil market, did not revert to a new post-Covid normal until late CY22 while demand for biofuels has stayed supportive. Altogether, we expect firm CPO prices to remain despite a slight nudge down in our expected CPO price for IOI, from RM4,100 to RM3,900 per MT for FY23F and from RM3,800 to RM3,700 in FY24F. Unlike more inelastic food and fuel markets for upstream products, IOI’s downstream resource-based earnings are more sensitive to broader economic headwinds. The group’s European downstream units are also enduring high energy costs, hence despite decent margins, better pricing power (more specialty than commodity type products) with lower input palm oil prices, we expect weaker though still commendable downstream contributions ahead.

Forecasts. We cut our FY23F CNP forecast by 7% but raise our FY24F CNP by 10% on CPO prices staying firm with lower cost and taxes.

We reduce our TP by 10% to RM3.80 (from RM4.20) as we replace the PER valuation (at 15x FY23F EPS) with FY24F Price/BV of 1.8x plus a 5% ESG premium (see Page 3).

IOI is investing to improve its planting materials, digitalisation as well as estate infrastructure to allow greater mechanisation. Its global downstream oleochemicals and specialty oils & fats operations are equally commendable. Equally impressive is its initiative to convert oil palm trunks into palm-based wood products so as to achieve net zero waste.

All in all, we like IOI’s management leadership, land-backed NTA, low gearing and a good ESG rating of 4-star. However, margins are expected to stay muted for another quarter or two and IOI’s share price is already close to our TP. Maintain MARKET PERFORM.

Risks to our recommendation include: (i) weather impact on edible oil supply, (ii) unfavourable commodity prices fluctuations, and (iii) production cost inflation.

Source: Kenanga Research - 31 May 2023